Federal Budget Issue: Do We Need an Energy Tax?

Policy Backgrounders | Taxes

No. 127
Friday, June 04, 1993
by Stephen Moore


Notes

  1. A British Thermal Unit (BTU) is the amount of energy needed to raise the temperature of a pound of water by one degree Fahrenheit. For example, a gallon of gasoline contains about 125,000 BTUs. The Clinton administration originally proposed to tax most fuels at a rate of 25.7 cents per million BTUs with a 34.2 percent surtax added to oil, gasoline and diesel fuel. So-called "green" energy, such as electricity-making windmills and solar power, would be exempt. So-called "clean" energy, such as natural gas, hydroelectric power and nuclear power would be taxed at the lower, base rate. Dirty fuels such as coal also would be taxed at the base rate.
  2. These arguments are summarized in John A. Tatom, "The Case against the BTU Tax," Federal Reserve Bank of St. Louis, May 1993.
  3. Clinton used many of these arguments for the energy tax when he unveiled his economic plan in the State of the Union Address, February 17, 1993.
  4. Energy Secretary Hazel O'Leary, statement on NBC Today Show, February 22, 1993.
  5. Associated Press, May 14, 1993.
  6. Tax Foundation, "Proposed Energy Tax Hits States, Sectors Unevenly," April 22, 1993.
  7. Robert Hershey, "Energy Tax Impact Understated Up to 50%, Industry Officials Say," New York Times, February 22, 1993, p. A14.
  8. Original inequities have been compounded as a result of horse-trading in the U.S. House of Representatives, leading to "one of the most exemption-loaded ... revenue raisers in history." Michael Wines, "Congress's Twists and Turns Reshape Bill on Energy Tax," New York Times, June 2, 1993.
  9. Tax Foundation, "Proposed Energy Tax Hits States, Sectors Unevenly."
  10. Joyce Yanchar and Susan Haltmaier, "The Pros and Cons of Alternative Energy Taxes," DRI/McGraw Hill U.S. Review, March 1993.
  11. The Earned Income Tax Credit is a cash payment by government to low-income working families.
  12. Chris Frenze, "Taxing the Rich?" Joint Economic Committee, Minority Report, March 9, 1993.
  13. Ibid. Many of these taxpayers are elderly.
  14. A third possibility is that the energy tax costs might be fully pushed onto consumers and absorbed by families, substantially reducing their savings. This would mean that any reduction in government borrowing would be offset dollar for dollar by reductions in personal savings. Hence, national savings would not be raised by the energy tax, thus nullifying the objective of levying the tax in the first place.
  15. Robert Rubin, speech before the National Association of Manufacturers, Washington, DC, April 1993.
  16. DRI/McGraw Hill, "Comparison of the Economic Impact of the Clinton Administration's BTU Tax and Alternatives," May 1993.
  17. National Association of Manufacturers, "Survey on Clinton Economic Program," May 1993.
  18. Much of the analysis in this section is derived from Stephen Moore, "Attention Shoppers: Energy Tax Means Prices Are Going Up, Up, Up," Joint Economic Committee, Minority Report, June 1993.
  19. Lawrence C. Kumins, "The BTU Tax Proposal," Congressional Research Service, Issue Brief, April 19, 1993.
  20. Edison Electric Institute, "President Clinton's BTU Energy Tax Proposal," February 23, 1993.
  21. Calculated at $1.92 per week. See Moore, "Attention Shoppers."
  22. House Ways and Means Committee, Minority Staff, "The Truth about the Clinton Energy Tax," April 1993.
  23. Affordable Energy Alliance, press release, May 5, 1993.
  24. House Ways and Means Committee, Minority Staff, "The Truth about the Clinton Energy Tax."
  25. American Farm Bureau Federation, press release, May 5, 1993.
  26. Ibid.
  27. U.S. Senate Republican Policy Committee, news release, "The Clinton Energy Tax Puts People Last," February 17, 1993.
  28. Air Transport Association estimate, February 1993.
  29. Thomas Hayes, "How Industries View Energy Tax," New York Times, February 26, 1993.
  30. "Energy Tax Strives to Be Fair, But Some Would Feel Picked On," Wall Street Journal, February 19, 1993.
  31. Institute for Research on the Economics of Taxation, "Clinton Energy Taxes: Much Damage, Little Gain," March 19, 1993. Substantial job losses would result from the increase in gasoline costs alone. A 10 cent-a-gallon tax increase, which is roughly equivalent to the Clinton proposal, leads to a $26 billion GNP loss and a 250,000 employment loss. See Norman Ture, Carlos Bonilla and Stephen Entin, "The Impact, Shifting and Incidence of an Increase in the Gasoline Excise Tax," Institute for Research on the Economics of Taxation, July 17, 1992.
  32. The National Association of Manufacturers' economic model predicts that by 1998 "output has been reduced by $38 billion relative to its current-law path. Among the components of GDP, the largest losses come in personal consumption expenditures and business fixed investment.... The cost in employment is considerable. By 1998, civilian employment is lower by 610,000 jobs. In sum, the BTU tax does considerable damage to the economy and is extremely inefficient at reducing the deficit." Jerry J. Jasinowski, President, National Association of Manufacturers, testimony before the U.S. Senate Committee on Energy and Natural Resources, February 24, 1993.
  33. American Petroleum Institute, "Why Broad-Based Energy Taxes Would Harm the U.S. Economy and American Consumers," 1993.
  34. DRI/McGraw Hill, "Comparison of the Economic Impact of the Clinton Administration's Proposed BTU Tax and Alternatives."
  35. Tax Foundation, "Proposed Energy Tax to Have Dramatic Impact on U.S. Employment," May 26, 1993.
  36. John Shanahan, "Taxing America's Energy and Vitality," Heritage Foundation Backgrounder, No. 943, May 1993.
  37. DRI/McGraw Hill, "Comparison of the Economic Impact of the Clinton Administration's Proposed BTU Tax and Alternatives."
  38. Michael Fumento, "What Would an Energy Tax Do?" Investor's Business Daily, March 5, 1993, p. 1A.
  39. Ibid.
  40. Philip Verlenger, testimony before the U.S. Senate Committee on Energy and Natural Resources, February 24, 1993.
  41. Affordable Energy Alliance.
  42. Several independent analyses have concluded that the Clinton administration has substantially overestimated the deficit reduction impact of the BTU tax. They include the Institute for Research on the Economics of Taxation, "Clinton Energy Tax Increases: Much Damage, Little Gain" B.G. Hickman, H.G. Huntington and J.L. Sweeney, Macroeconomic Impacts of Energy Shocks (Stanford, CA: Stanford University Press, 1987); Chris Frenze, "The BTU Tax: If It Moves, Tax It," Joint Economic Committee, Republican Staff, May 21, 1993; John A. Tatom, "The Case against the BTU Tax" Everson Hull and Lawrence Kumins, "Policy and Macroeconomic Effects of a BTU Tax," May 3, 1982; and American Petroleum Institute, "The Effect of the BTU Tax on Reducing the Deficit," 1993.
  43. Treasury calls this effect an income offset. The effect assumes that nominal GDP and the price level remain unaffected by the energy tax. See "The Administration's Modified BTU Tax Proposal," U.S. Treasury, April 8, 1993.
  44. DRI/McGraw Hill, "Comparison of the Economic Impact of the Clinton Administration's Proposed BTU Tax and Alternatives."
  45. Ibid.
  46. Budget of the United States Government, Fiscal Year 1994.
  47. Stephen Moore, "Government: America's Number One Growth Industry," Institute for Policy Innovation, 1993.
  48. State of the Union address.

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